How to avoid paying your full credit card interest (even if you can’t pay back the full sum)

You really shouldn’t have any credit card interest. With just basic financial planning, you can ensure credit cards are only a mode of payment; not an actual source of loans. But we understand the psychological realities involved: at some point, you may go overboard. Here are some things you can do to reduce the damage:

First, understand how the credit card interest works

Credit cards have an interest rate of about two per cent per month or 24 per cent per annum. This interest is applied on any outstanding debt, at the end of the billing cycle. Note: not at the end of the month”, but on the last day of the billing cycle (that could even be the 20th of the month, depending on when you start using the card).

Missing the minimum repayment (typically $50 or five percent of the amount owed, whichever is higher) can cause an “interest rate adjustment”. This can mean it’s possible to end up paying more than the standard 24 per cent.

Okay, so I can’t possibly pay my full credit card bill. What now?

The first solution you can consider is an interest-free balance transfer.

This is when you transfer your credit card debt from one card to another (which we’ll call the transfer card). Hear us out, it’s not as crazy as it sounds.

A balance transfer imposes a one-time fee, usually 1.5 per cent of the amount owed. But once the transfer is made, you typically have six months to repay the debt on the transfer card, at zero interest.

For example, say you owe $10,000 on your HSBC credit card. You obtain a balance transfer card from DBS and transfer the $10,000 to it. You now owe $10,150 on the DBS transfer card.

However, you will have six months to clear the $10,150, and during that time the interest rate is zero per cent per annum. What if you had just left it on your HSBC card? Well at two per cent per annum, you will need to pay around $10,549 in six months to clear the debt. You’re saving around $399 by shaving off the interest.

The second solution is to use a personal loan.

Most personal loans have an interest rate of between six and nine per cent per annum. This is much lower than the credit card’s 24 per cent. So if your credit rating is good, you could take out a personal loan at the lowest possible rate, and then use it to pay off the credit card.

If you’re lucky, you might be able to find one of the bank promotions, in which the interest rate can be even lower. Sometimes you can even find personal loans at zero percent interest for six months (be careful, it shoots up afterwards).

As a last resort, if you have collateral that you don’t urgently need, you can use that and a pawn shop.

In Singapore, pawn shops have interest rates lower than credit cards. It’s typically 1.5 per cent per month but can sometimes go as low as one per cent. You can pledge a watch, jewellery, gold, etc., for cash, and use that to pay off the credit card.

Afterwards, you can gradually repay the pawn shop at 1.5 per cent per annum (your pledge will not be auctioned for six months). This is still less than you’d pay by leaving rollover debt on your card.

As a preventive measure, lower your credit ceiling

If you always end up paying credit card interest, because you can’t stop shopping, try lowering the credit ceiling. Call the bank, and ask to set the credit ceiling at half your monthly income or below (the default setting is two to four times your monthly income).

This minimises the chance that you’ll have too much debt to repay in full. It also limits the damage in the event someone steals your card.

Do NOT try to out-invest the credit card debt

You do need to keep saving even as you pay down debt. However, do not keep making minimum repayments, because you want more money on hand to invest. Most passive investments can’t manage more than five percent per annum, so it is unwise to “out-invest” your credit card debt.

Focus on paying off your credit cards as soon as possible. And once you’re done, consider learning how to save and invest properly instead of relying on credit. We have simple investment techniques that can grow your income, and ensure you won’t end up in the same situation again.

Ryan is a successful property investor and has been writing about money, saving and spending, and personal finance for the last ten years. His articles have been featured in leading publications including Yahoo! Finance, Esquire, Her World and AsiaOne.

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